Posted by Jim Sparrow on Thursday, June 4th, 2009 at 5:25pm.

Last week’s move by Canadian lenders to raise their longer fixed term mortgage rates sparked some interesting discussions amongst clients. I thought it would be helpful to revisit what influences mortgage rates and discuss why Canadian mortgage rates are increasing.

Mortgage Rates & Bonds

Contrary to popular opinion, mortgage rates are not tied to interest rates *at least not directly*. Mortgage rates in fact are related to bonds and their yields (rates). Bonds are what are known as debt instruments, and Canadians have roughly 30 times more invested in debt markets *mainly bonds* than they have invested in equity markets *stocks*. The yield of a bond increases as the price of the bond falls. We won’t get into the many variables affecting bond prices & yields, but as bonds become less appealing to the public *and their yields rise*, longer term fixed mortgage rates also rise.

Bond Prices

The financial chaos that has swept the world has resulted in the issuance of an incredible amount of debt *primarily bonds* by governments around the world. Quantitative easing is the term used to describe US monetary policy to buy back government bonds & raise bond prices, which in turn should have lowered bond yields and kept mortgage rates at historical lows. The US Federal Reserve instituted quantitative easing in late March 2009, resulting in a large one day rise in bond prices. Unfortunately the effect was short lived, and bond prices have gone into a tailspin since then. Additionally, North Americans are worried about inflation and have started moving large cash positions into the riskier equity *stock* markets.

The net result is that even though the Bank of Canada’s has left the benchmark lending rate at 0.25 per cent, long term fixed mortgage rates are on the rise.

What are your thoughts on mortgage rates? Are you planning on staying with a lower variable rate mortgage or locking into a longer fixed rate?

Listings on our site all have a handy mortgage calculator which allows you to calculate monthly payments using whatever criteria you choose.

Jim Sparrow sells Calgary Real Estate with Royal LePage & specializes in South Calgary and luxury homes. Browse through our Living in Calgary blog, view current listings. and when you have questions, simply email. or page me directly at Royal LePage Solutions 403.252.5900 .